The Fading American Dream of Working for Yourself

The self-employed middle class is far smaller than we often assume.

We Americans pride ourselves on being entrepreneurial, and praise for the start-up culture that created Apple, Facebook, Twitter, Airbnb and other global success stories is a staple in the media. But the data paints a much different picture: when the self-employment rate is compared among the 34 wealthy countries that make up the Organisation for Economic Co-operation and Development (OECD), the U.S. comes in dead-last at 6.6 percent. Germany and Japan both have self-employment rates above 11 percent.; Italy and South Korea have rates above 25 percent.

Last time I checked, The American Dream was not “working for someone else.”

One common way to define the middle class is in terms of self-employment and the ownership of one’s work. As Marian Kester Coombs wrote recently, “Economically, the middle classes were once proprietors, self-employed owners of property and their own labor.” In Coombs’ analysis, “Middle class is not an income level but a material relationship to society,” specifically, ownership of one’s labor and income-producing capital: “the key middle-class elements (are) independence, self-sufficiency, ownership, entrepreneurship, and real social power.”

So how many of America’s labor force of 147 million are both self-employed and middle class? We can throw around vague definitions and get nowhere, or we can dig into hard data. Are you game for the data dig?

In a previous article, I sought to define middle class both by income and financial characteristics. For the sake of simplicity, let’s set an individual income of $50,000—close to the nation’s median income of about $53,000—as the minimum threshold of middle class membership.

To answer how many Americans are both self-employed and middle class, we must once again dive into a statistical thicket that defies easy exploration.

Let’s set aside businesses with employees and just look at self-employed: sole proprietors and the incorporated self-employed. (The majority of these are self-employed professionals such as physicians, attorneys, engineers, accountants, etc. who incorporate for tax and liability reasons.) According to the IRS’s income and deduction data for tax year 2013, the total number of individuals who reported taxable income was 147.4 million; the total number who paid self-employment income tax was 18.9 million.

On the face of it, this looks like a big number, almost 13 percent of America’s work force. But does making a few thousand dollars a year in a side business meet Coombs’ key attributes of the middle class: independence, self-sufficiency, ownership, entrepreneurship? Clearly not.

How many self-employed earn $50,000 or more annually? About 7.5 million, or 5 percent of America’s work force. But other data suggests the independent self-employed middle class is a lot smaller than 5 percent.

This is not an abstract topic to me. My wife and I are independent self-employed. We don’t get a paycheck from another employer nor do we have any income from trust-funds or the government. This is what the old standard of self-employed middle class meant: all of the household income is generated by assets and labor you own.

One of the few deductions reserved for the self-employed is health insurance: since there’s no employer to pay this hefty expense, the self-employed either go without insurance or pay the full cost themselves. (In our case, $13,000 a year for a basic plan with no eyewear, dental or medication coverage.) Given the high cost of unsubsidized health insurance, anyone who qualifies for this deduction will take it, as it offers a substantial tax break. A grand total of 2.5 million taxpayers with incomes of $50,000 or more took this deduction.

This means millions of people with $50,000 or more in self-employment income paid no health insurance premiums. Either they chose to have no health insurance (in which case they no longer qualify as middle class by my definition), or their spouse is conventionally employed and provides healthcare coverage for the entire household.

By this measure, only 2.5 million unincorporated workers are truly independent self-employed. That’s a razor-thin 1.7 percent of the nation’s work force.

The incorporated self-employed have their corporations pay their insurance, so let’s add in the 4.5 million S-corporations/partnerships that reported income of $50,000 or more. That gives us a total of 7 million independent self-employed.

Returning to small businesses, the Census Bureau reports that about 5.1 million firms are “very small enterprises,” defined as having 20 or fewer employees. This category includes the vast majority of businesses associated with middle class enterprises: dry cleaners, cafes, auto mechanics, restaurants, remodeling contractors, technical services and so on. Clearly, these fit Coombs’ key attributes of the middle class: independence, self-sufficiency, ownership, entrepreneurship.

There is one other class of independent self-employed: small landlords and landladies. About 2.4 million taxpayers report net rental income of between $50,000 and $200,000. This income is not reported as self-employment income (Schedule C) but as supplemental income (Schedule E). Those small landlords and landladies who are actively engaged in managing their rental properties certainly qualify as self-employed middle class in terms of ownership and entrepreneurship. (Many may have other jobs, but we’ll count them as potentially self-employed.)

If we add all these categories up (7 million + 5.1 million + 2.4 million), about 14.5 million people likely qualify as self-employed middle class (or upper-middle class). It’s a considerable number, but it’s only 10 percent of the nation’s work force and 4.6 percent of the nation’s 316 million people. If working for yourself and achieving a middle class income is the American Dream, we might want to take a hard look at why a mere 10 percent of the work force has reached this goal.

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25 Responses to The Fading American Dream of Working for Yourself

Factoring in the costs: regulations,insurance,payroll taxes,other taxes,licensing,overhead plus other hidden costs,many of them mandated by the government,makes it very difficult in today’s day and age to run a small “one man” business. Especially compared to 40 or 50 years ago. Also the growth of the meg-chain businesses have forced out of business many “mom and pop” enterprises. Individually owned drug stores,shoe stores,book stores and hardware stores among others,at least in my neighborhood,are a thing of the past. In the end,its a matter of not being able to compete because of volume buying and the costs of doing business. Of course the government doesn’t like “independent” small businesses especially that deal in cash. It makes it difficult for the government to skim off its taxes and control the actions of a sole proprietor owner. This is especially true when the number of people who are dependent on the state outnumber the people creating wealth in the economy.

The franchise model is dominant, and chain stores are powerful forces to try to compete against in most markets. Add cities that have been completely revamped to make driving 10 miles easier than walking 10 blocks. And now … Amazon!

Some of these things might be bad, some good. But they’re the new reality …

The reality is many “self-employed” are corporately unemployed poor scraping by. As in so many other ways, the fantasies we have about ourselves as Americans are now self-deceptive, based on a lost past.

The difficulty with this “relation to production” definition of middle class is that, by definition, most people will never fulfill it, no matter now much they make. Modern society can’t function without large firms and institutions, and someone has to work there: we could call them the working class, but that obscures as much as it reveals. A Google engineer who makes high six figures is dependent on his employer for a paycheck, but he’s not exactly the same kind of proletarian as a line cook.

Congratulations on an article that gets into the weeds on counting the people who are in practical effect self-employed. I can add three points. First, small businesses commonly underreport their income, often by large amounts, so you can’t take IRS statistics at face value. Second, there are still quite a few closely held C corporations around. Third, it looks like Mr. Smith is overlooking farmers. These points do not detract from the thrust of the article, however. Conceivably 15% of the Americans have achieved the American Dream, rather then 10%.

libertarian jerry–I suggest you look at Greece. One of the reasons the country is in such a bad shape is the extremely high level of tax evasion that is carried out by the self-employed. Doctors and lawyers rarely accurately report their income.

What branches of the government would you get rid of and why? And how do you expect the general populace to protect themselves against externalities?

The independent practice of medicine is disappearing. Too much overheard in dealing with and too power negotiating with insurers. Multi partner groups are driven out of business. The partners become hospital employees. Big hospitals acquire other ones. Doctors have no more autonomy than a WalMart employee might.

Why? Is the guy who owns a restaurant with a couple dozen employees somehow not “self-employed”? Heck even way back when farmers used to hire other guys to help with the harvest, and ranchers of course hired cowboys.

grumpy, the biggest government savings would be to re-orient the Defense department to provide defense to the nation instead of providing global power projection. But we could also abolish the Department of Homeland Security, moving those existing needed agencies out from under the new and draconian level of bureaucracy, eliminate the Department of Education, Department of Energy, moving the nuclear weapons program back under a separate technocrat agency as before, eliminate HUD, reduce social security and medicare benefits to be sustainable, and eliminate the Department of Agriculture, including the farm program.

Grumpy Realist……The reason Greece is in such bad shape is not because of it’s productive economic class but because of the large numbers of the population that are ensconced in “produce nothing” government “jobs,”are able bodied but refuse to be employed and instead live off of welfare,countless draconian counterproductive business and work regulations plus massive corruption on the part of politicians and bureaucrats. I don’t blame people for not having the fruits of their labor stolen by corrupt politicians and an army of parasites. You call it “tax evasion.” I call it theft evasion.

The penalty for failing in your own business is now too high. As I think Jon Stewart (!) pointed out, you don’t encourage small entrepreneurs by lowering taxes hence increasing the rewards when they succeed, you encourage them by reducing the penalties when they fail (as any reader of behavioural economics knows).

Medication (prescription) coverage is one of the 10 essential benefits under the ACA. How are you not getting prescription coverage? Where on earth do you live that you’re paying $13,000 a year for this policy? Is this for an entire family, or just you and your wife?

For comparison, I am a middle-aged, self-employed woman and pay $3600 in yearly premiums for a silver plan that includes prescription coverage. This is not on the exchange, just a private plan.

Our tax code is heavily skewed to benefit corporations that have the legal knowledge and lobbying power to ensure that their profits are shielded from the kinds of taxes that small businesses shoulder. Thanks to NAFTA, multinationals can dramatically drop labor costs by manufacturing abroad and then sell the product with no tariff or penalty here in the US, while a small business has to foot the labor bill of US employees in full.
If we want small businesses to return, there are some very straightforward policy changes that could be made to level the playing field between small business and their corporate competitors. Personally, as a small business owner, I have come to the point where I’m convinced our present situation is a feature, not a bug.

I’ve been shouting this from my rooftop for some time. When I was a kid in my home town, many of my friends parents owned their businesses. They had pharmacies, hardware stores, restaurants, retail stores, grocery stores, etc. They employed people in the community with living wages and reinvested the remaining profits back into the community. Fast forward several decades and you can’t hardly find these businesses privately owned. Big corporate national chains have taken over and are even cannibalizing themselves over time, giving the consumer less and less choices. They pay as little as they can and ship the money far out of town. The mom and pop local business cannot compete against these corporate monsters who have lobbyist, attorneys, and politicians in their back pocket to beat you down with if you even dare to try. The last bastion of private ownership was probably the professional service industries, but alas this is disappearing now too. The local accountant, doctor, engineer, lawyer, etc are now being bought out or pushed out by larger and larger firms. It’s only a matter of time before we will all be working for a handful of huge mega-corporate beasts who’s CEO’s dine nightly with the Washington elite.

But are we not ‘ALL’ self employed? We have, in the USA, a chance to negotiate our labour to the highest bidder or to the entity that treats us fairly. No one is forced into a contract with an employer, and we can terminate our contract with that employer at will. I see the point you are making about obtaining the’American Dream’, however I object to the notion that the American dream is that of owning a business. I work for myself by providing labor to an employer. I do not wish the burden of making hard descisions that could cost me all that I have, but rather prefer someone else make those descisions and take those risks. And am comfortable with what contracting my labor. Point being, ‘The American Dream’ is different to different people. One must e comfortabw with their dream, or they should change it.

In the 1940s, economist Sumner H. Slichter called it “government guided enterprise”. Back then the term applied more to the large corporation than the small business. I would term it today state-strangled enterprise and the victims are more often small self-employed individuals.

But the disease can be traced back further to the love affair of America with popular lawmaking. Statutes are a recent invention in human affairs, at least in the English-speaking world, but of late they have exploded into a de facto socialist regulatory environment. It is estimated that the legislation law making in American in the first half of the 19th century was on thousandfold that of the preceding 5 centuries in England. And does anyone believe the activist period from 1830-1860 compares to the legislation activity since?

But no one, I think, has ever called attention to the enormous differences in living, in business, in political temper between the days (which practically lasted until the last century) when a citizen, a merchant, an employer of labor, or a laboring man, still more a corporation or association and lastly, a man even in his most intimate relations, the husband and the father, well knew the law as familiar law, a law with which he had grown up, and to which he had adapted his life, his marriage, the education of his children, his business career and his entrance into public life — and these days of to-day, when all those doing business under a corporate firm primarily, but also those doing business at all; all owners of property, all employers of labor, all bankers or manufacturers or consumers; all citizens, in their gravest and their least actions, also must look into their newspapers every morning to make sure that the whole law of life has not been changed for them by a statute passed overnight; when not only no lawyer may maintain an office without the most recent day-by-day bulletins on legislation, but may not advise on the simplest proposition of marriage or divorce, of a wife’s share in a husband’s property, of her freedom of contract, without sending not only to his own State legislature, but for the most recent statute of any other State which may have a bearing on the situation.

–Popular Law-making: A Study of the Origin, History, and Present Tendencies of Law-making by Statute, Frederic J. Stimson (1910)

I work for myself by providing labor to an employer. I do not wish the burden of making hard descisions that could cost me all that I have, but rather prefer someone else make those descisions and take those risks.

Surely it’s more of a risk to place yourself and your livelihood at the mercy of your employer. Your employer might make bad decisions that run the company into the ground, at considerable cost to you. He/She might also outsource your job to a place where people work for less than you do. He/She might well also place quite considerable restrictions on your personal freedom (drug tests, credit checks, restriction of your access to birth control medication, etc.).
It seems quite a subservient attitude to assume that other people are much more competent than you are, and only by giving up your personal freedom are you really able to gain some personal security.

the underground economy of small business and the self employed who do not pay taxes is many tens of millions larger than you think. Where there are immigrants there is massive tax fraud plus they get all the government benefits since government benefits are based upon the tax return. Just look at Glendale CA.

I always thought “the American dream” was predicated on general economic well being, social mobility (particularly of the multi generational variety), and personal and political freedom. If any one economic factor was an indispensable part of the “dream,” I would have said that it was home ownership, not self employment.